Real Earnings Management Around CEO Turnovers

Abstract

Following CEO turnovers, US firms adjust real business activities to manage earnings downward (REM bath). This effect is most pronounced in firms with low levels of institutional ownership. REM baths early in CEOs’ tenure can be confounded with legitimate adjustments to business activities. However, we show that they are not accompanied by increases in R&D or capital expenses, nor are they explained by restructuring expenses. CEOs with short tenure record more negative REM measures in their first year of tenure, when compared with CEOs with long tenure.

Keywords: CEO Turnover, Real Earnings Management, Abnormal Operating Performance, Discretionary Accruals

JEL Classification: C23, G30, M41